[As with most old English Appellate cases the account
begins with a "headnote" by the Court Reporter describing the "facts" as
they are revealed by the pleadings, and summarizing the proceedings below.]

At the trial before Crompton J., at the last Gloucester
Assizes, it appeared that the plaintiffs [Joseph and Jonah Hadley, whose
firm was known as "City Flour Mills"] carried on an extensive business
as millers at Gloucester; and that, on the 11th of May, their mill was
stopped by a breakage of the crank shaft by which the mill was worked.
The steam-engine was manufactured by Messrs. Joyce & Co., the engineers,
at Greenwich, and it became necessary to send the shaft as a pattern for
a new one to Greenwich. The fracture was discovered on the 12th,
and on the 13th the plaintiffs sent one of their servants to the office
of the defendants, who are the well-known carriers trading under the name
of Pickford & Co., for the purpose of having the shaft carried to Greenwich.
The plaintiffs' servant told the clerk that the mill was stopped, and that
the shaft must be sent immediately; and in answer to the inquiry when the
shaft would be taken, the answer was, that if it was sent up by twelve
o'clock any day, it would be delivered at Greenwich on the following day.
On the following day the shaft was taken by the defendants, before noon,
for the purpose of being conveyed to Greenwich, and the sum of [2 pounds
sterling 4 shillings] was paid for its carriage for the whole distance;
at the same time the defendants' clerk was told that a special entry, if
required, should be made to hasten its delivery. The delivery of the shaft
at Greenwich was delayed [for one week, till Saturday the 21st, because
the shaft was sent by canal rather than by rail]; and the consequence was,
that the plaintiffs did not receive the new shaft for several days after
they would otherwise have done, and the working of their mill was thereby
delayed, and they thereby lost the profits they would otherwise have received.

[The Hadleys brought an action against Pickfords
and named Joseph Baxendale, the London-based managing director of the firm,
as the defendant. Pickfords was unincorporated and, therefore, Baxendale
was personally liable for any judgment against the firm. Originally the
Hadleys contended that they had lost five days of milling and 300 pounds
sterling in lost profit because of Pickford's delay. At trial they
claimed only 200 pounds sterling in losses, and witnesses testified as
to 120 pounds sterling in lost profits. The case was given to the
jury, and they awarded the Hadleys 50 pounds sterling in damages. The defendants
believed that these damages were too remote, that they were "consequential"
and not a direct result of their delay in delivery and that, therefore,
the judge below should have instructed the jury to limit their award only
to the direct result of the breach. They appealed to the Court of Exchequer,
presided over by Barons Alderson, Martin, and Parke.]

ALDERSON, B. We think that there ought to be a new trial in this
case; but, in so doing, we deem it to be expedient and necessary to state
explicitly the rule which the Judge, at the next trial, ought, in our opinion,
to direct the jury to be governed by when they estimate the damages. ...

Now we think the proper rule in such a case as the
present is this: Where two parties have made a contract which one of them
has broken, the damages which the other party ought to receive in respect
of such breach of contract should be such as may fairly and reasonably
be considered either arising naturally, i.e., according to the usual course
of things, from such breach of contract itself, or such as may reasonably
be supposed to have been in the contemplation of both parties, at the time
they made the contract, as the probable result of the breach of it.
Now, if the special circumstances under which the contract was actually
made were communicated by the plaintiffs to the defendants, and thus known
to both parties, the damages resulting from the breach of such a contract,
which they would reasonably contemplate, would be the amount of injury
which would ordinarily follow from a breach of contract under these special
circumstances so known and communicated. But, on the other hand,
if these special circumstances were wholly unknown to the party breaking
the contract, he, at the most, could only be supposed to have had in his
contemplation the amount of injury which would arise generally, and in
the great multitude of cases not affected by any special circumstances,
from such a breach of contract. For, had the special circumstances
been known the parties might have specially provided for the breach of
contract by special terms as to the damages in that case; and of this advantage
it would be very unjust to deprive them. Now the above principles
are those by which we think the jury ought to be guided in estimating the
damages arising out of any breach of contract. ...

Now, in the present case, if we are to apply the
principles above laid down, we find that the only circumstances here communicated
by the plaintiffs to the defendants at the time the contract was made,
were, that the article to be carried was the broken shaft of a mill, and
that the plaintiffs were the millers of that mill. But how do these circumstances
shew reasonably that the profits of the mill must be stopped by an unreasonable
delay in the delivery of the broken shaft by the carrier to the third person?
Suppose the plaintiffs had another shaft in their possession put up or
putting up at the time, and that they only wished to send back the broken
shaft to the engineer who made it; it is clear that this would be quite
consistent with the above circumstances, and yet the unreasonable delay
in the delivery would have no effect upon the intermediate profits of the
mill. Or, again, suppose that, at the time of the delivery to the
carrier, the machinery of the mill had been in other respects defective,
then, also, the same results would follow. Here it is true that the
shaft was actually sent back to serve as a model for a new one, and that
the want of a new one was the only cause of the stoppage of the mill, and
that the loss of profits really arose from not sending down the new shaft
in proper time, and that this arose from the delay in delivering the broken
one to serve as a model. But it is obvious that, in the great multitude
of cases of millers sending off broken shafts to third persons by a carrier
under ordinary circumstances, such consequences would not, in all probability,
have occurred; and these special circumstances were here never communicated
by the plaintiffs to the defendants. It follows, therefore, that
the loss of profits here cannot reasonably be considered such a consequence
of the breach of contract as could have been fairly and reasonably contemplated
by both the parties when they made this contract. For such loss would
neither have flowed naturally from the breach of this contract in the great
multitude of such cases occurring under ordinary circumstances, nor were
the special circumstances, which, perhaps, would have made it a reasonable
and natural consequence of such breach of contract, communicated to or
known by the defendants. The Judge ought, therefore, to have told
the jury, that, upon the facts then before them, they ought not to take
the loss of profits into consideration at all in estimating the damages.
There must therefore be a new trial in this case. ...

Note:

See the discussion of this case in Richard Danzig, "Hadley v. Baxendale:
A Study in the Industrialization of the Law," 4 J. Legal Stud. 249 (1975).

Note, too, that the facts as reported in the headnote are not exactly
the same as those used by Baron Alderson in deciding this case. Specifically,
it appears to be the case that the Hadleys' agent did mention to the carrier
that there was a special urgency attached to getting the shaft back as
quickly as possible.

Questions:

1. What is the default
rule announced in Hadley? Is that rule efficient? Why is it
a default rule and not a mandatory rule?

2. What would the state
of the world be if the default rule announced in Hadley were the opposite
way around? That is, would it be less efficient if the default rule
were that the breacher was routinely liable for all the innocent party's
losses?